Inversions Motivated by Overseas Cash Hoards?

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Could it be that contrary to common assumption, the reason large U.S. companies are buying firms overseas and redomiciling there — called an inversion — is not so they can be more competitive with global peers by avoiding the 35% federal corporate tax rate?

Edward Kleinbard

That seemingly radical opinion comes nonetheless from a quite knowledgeable source: Edward Kleinbard, a University of California law professor, who’s also a former chief of staff to the Congressional Joint Committee on Taxation.

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In fact, most U.S. multinationals pay effective tax rates that are “the envy of their international peers,” Kleinbard wrote in a new paper, as reported by The New York Times. That’s because they’ve stashed around $2 trillion in other countries. The Government Accountability Office last calculated the average tax rate paid by U.S. multinationals in 2010, putting the figure then at 12.6%. It’s the desire to make greater use of that cash that’s really driving the recent wave of interest in corporate inversions, the professor contends.

Aided by “aggressive tax planning technologies,” American companies are already more competitive than their foreign rivals because of the way the U.S. tax system is structured, according to Kleinbard. The former are “unencumbered by any of the anti-abuse rules to which non-U.S. multinationals domiciled in jurisdictions with better designed territorial systems might be subject,” he wrote in his paper, according to The Times.

He also wrote, though, that some U.S. companies are finding ways to effectively use their offshore cash hoards in the United States. For example, the tax code allows them to borrow money at home and use interest earned on the foreign-based funds — which can be included in the parent company’s U.S. income — to pay the interest on the loans. That “offsets the tax deduction for the interest expense on the firm’s U.S. borrowing, and the firm is left in the same economic position as if it had simply repatriated the cash tax-free,” Kleinbard wrote, as reported in The Times.